Monday, December 1, 2008

The Myth of Government Deregulation

I wish I had a dollar for every time I read or heard someone say that 'deregulation' of the markets is what caused the downturn in the economy. When was the last time the federal government deregulated anything? And what was the part that was deregulated to cause this? Shouldn't it make sense to regulate that part again to help correct the economy?

There never were any 'deregulation of the markets' only a buzzword that a Democratic controlled Congress drops to pass the buck of blame to someone else, namely, the President.

Why then should capitalism take the blame today--when capitalism doesn’t even exist? Consider the current crisis. The causes are complex, but the driving force is clearly government intervention: the Fed keeping interest rates below the rate of inflation, thus encouraging people to borrow and providing the impetus for a housing bubble; the Community Reinvestment Act, which forces banks to lend money to low-income and poor-credit households; the creation of Fannie Mae and Freddie Mac with government-guaranteed debt leading to artificially low mortgage rates and the illusion that the financial instruments created by bundling them are low risk; government-licensed rating agencies, which gave AAA ratings to mortgage-backed securities, creating a false sense of confidence; deposit insurance and the “too big to fail” doctrine, whose bailout promises have created huge distortions in incentives and risk-taking throughout the financial system; and so on. In the face of this long list, who can say with a straight face that the housing and financial markets were frontiers of “cowboy capitalism”?

My thanks to Cox and Forkum.

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